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While 2018 should finish on a high note, 2019 may provide many challenges, says Quincy Krosby, Prudential's chief market strategist in her Q4 2018 market commentary

October 05, 2018

Highlights:

  • Seasonality, coupled with solid earnings, suggest positive market finish to 2018
  • Fed continues to promise gradual rate hikes through 2019
  • Complex China tariff issues could disrupt supply chains

While 2018 should finish on a high note, 2019 may provide many challenges, including the fading of fiscal stimulus, peak earnings and intensified scrutiny of the yield curve as concerns mount over the strength of the expansion. Choosing heads or tails correctly will matter as liquidity continues to be drained from the global financial system and accommodation wanes, says Quincy Krosby, Prudential’s chief market strategist in her Q4 2018 market commentary, “Heads or Tails.”

The most common definition of “heads or tails,” according to the Merriam-Webster dictionary, refers to “a simple gambling game in which a coin is tossed and won by the player who successfully calls the side that lands upward.” Betting on the direction of the markets since the Federal Reserve began its quantitative easing (QE) program at the end of 2008 until completing the many phases of QE in 2014 meant either side of any coin won the toss. That’s hardly a gamble. How could it be, with the Fed providing an extraordinary amount of liquidity as its balance sheet grew to approximately to $4.5 trillion in 2014 from $850 billion at the end of 2008, and with the European Central Bank (ECB) launching QE in March 2015, joining the Federal Reserve and the Bank of Japan to envelop global markets in unprecedented monetary liquidity—all providing the underpinning and a sure bet that markets would thrive?

The fourth quarter, statistically, and in terms of seasonality, is the strongest for the year absent an unintended shock. But given that markets look ahead, we may begin to hear more discussion regarding a shift toward international markets where valuations are increasingly more attractive. Uncertainty surrounding the effect of a higher interest rate environment, the underlying longevity of fiscal stimulus, tariffs, and midterm elections could make the climb to the end of the year choppier than usual. Still, on a fundamental basis, solid leading economic indicators, combined with strong earnings growth, should propel the fourth quarter to a favorable finish. Over the past 27 years, the S&P 500 has registered a positive return 85 percent of the time. The returns are usually clustered during November and December, many times following a difficult October.

Read Quincy Krosby’s full Q4 2018 market commentary: Heads or Tails

To talk to Quincy Krosby about her views of the market, contact Lisa M. Bennett or Dara Scerbo.

The views and opinions are those of the author at the time of publication and are subject to change at any time due to market or economic conditions. This is solely for informational purposes. This is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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Contact(s)

Lisa M. Bennett
phone 973-802-2894

Dara Scerbo
phone 973-367-9318